Is Japan’s Line a flash in the pan?

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Messaging app Line rocketed in its Tokyo trading debut on July 15, 2016 after an eye-popping jump (27 per cent up) in New York just the day before, as investors cheered the year’s biggest technology share sale yet, a whooping USD1.3 billion IPO.  By the close of the Tokyo’s trading day, the firm was up 32 per cent at 4,345 yen (USD41) thus pushing its value to around USD8.6 billion.  The question that immediately comes to investors’ minds is whether Line can hold its own in a field crowded with mobile messaging services such as Facebook Messenger, WeChat and WhatsApp.   After having built up a big number of subscriber base, there is no doubt which direction Line will take next – to expand its growth through advertising revenue.  Indeed, the bigger question is whether Line represents a new breed of innovative technology companies that will revive Japan’s moribund economy, or just a one off, flash in the pan occurrence.

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Here are several factors to consider.

Talent mobility.  It is well known that in Japan, employees very rarely change the corporations that they work for.  This is due to a number of reasons, including the fact that big Japanese corporations consider job-hopping as immoral in the business world and it is very common for employees to work two to three decades for the same employers.  It is not uncommon for a typical Japanese corporation to offer fast-track promotions to the ablest college graduates, and once recruited Japanese corporations take internal talent development very seriously compared to their western counterparts.  Whilst this is good for big business, small business and upstarts are thus deprived of critical talents.  This in turn means less likelihood of a Japanese upstart to emerge as the future Google or Facebook.

Risk adversity.  Failure is rarely tolerated in Japanese culture, and in the investment world this means that an upstart without a good track record will get little support even from the richest Japanese investors.  Big business with low growth future but a credible past is more likely to attract the average stock market investor in Japan compared to small business with potentially explosive growth trajectory but without any sales figures to show.  It is no exaggeration to say that if Apple, Google or Facebook were Japanese upstarts, not American, they would not even be received by Japanese banks let alone by venture capital investors.

Foreign investment.  This is perhaps the most crucial factor of all.  Line is owned by South Korea’s Naver Corp, who launched Line’s messaging service in 2011 after the quake-tsunami tragedy damaged Japan’s telecoms infrastructure, forcing staff at Naver’s Japanese unit to use online resources to communicate.  The messaging service was later spun off as a separate firm based in Tokyo, and quickly built up its user base to about 218 million active monthly users, posting a revenue of 120 billion yen or 40 per cent from the year before.  Even though Line’s subscriber base is notably fewer than its biggest rivals, and that it has relatively little presence in the USA and Europe, in a risk-adverse nation like Japan, Line does not look like a typical upstart technology venture.  How many upstarts in Japan can replicate Line in this respect is a big question mark.

The bottom line is that, due to the lack of talent mobility and a high level of risk adversity of investors, Japanese upstarts face an uphill if not an impossible task.  Line succeeds because of its foreign connection, which it cannot do without.

Comments welcomed.